Examination of Witnesses (Questions 80
WEDNESDAY 7 DECEMBER 2005 (Morning)
Q80 Ms Keeble: That was also new.
Mr Weale: It is perfectly true
that we have not had those sorts of benefits for a very long time,
but we do have a body of theory that does imply that means testing
does reduce saving. I should add that that does not in itself
mean means testing is a bad thing.
Q81 Ms Keeble: In all the discussion
you have with people about pensions what you hear again and again
are people in their late thirties saying, "I haven't got
round to paying for a pension." I do not hear them saying
it does not matter because they can live on state benefits in
a council flat when they are 80 and have the pension credit. The
means testing thing and the idea that you can live comfortably
on means tested benefits never seems to be an attractive life
option for younger people.
Mr Weale: It depends on what part
of the pensions process you are looking at. I think financial
advisers have felt very uncomfortable about trying to encourage
people who are likely to be affected by means testing to save
in pensions because they run the risk that they will be very low.
The Government produces a table in the Pre-Budget Report about
how high marginal deduction rates affect people in work (Table
4.2) and I do wonder why we do not have anything like this for
people who are retired. It seems to me highly pertinent. It would
not answer your question about what is influencing people's decisions
but it would provide us with the numbers on the scale of the problem
taking all the rather complex benefits together.
Q82 Chairman: For MPs all this stuff
is anecdotal because advisers come along and say they do not want
to sell to people. The decision is 20 or 30 years down the line
and young people are not saving for pensions anyway. This idea
of it being related to means testing does not seem to have any
evidence to back it up. I have never heard a person on pension
credit saying, "I've never had to save because I am on pension
Mr Weale: I think what we have
is what you rightly describe as anecdotal, but we also have a
body of theory about how people who understand the system are
likely to behave. If you say that the pension credit does not
discourage saving for the people affected by it, that is a proposition
that, if true, relies on them not understanding its consequences.
My own view is that governments should be rather shy of promoting
policies that work best when people do not understand them.
Q83 Mr Fallon: This is not just anecdotal,
is it? Turner concluded that means testing over time is a major
impediment to effective voluntary personal saving.
Mr Weale: It depends on the scale
of the means testing who is affected by it. One cannot just say
means testing has that effect. There are degrees of means testing
and the stronger they are the more they become an impediment to
personal savings, so it is a relative not an absolute. I think
if he had produced a report saying that means testing does not
matter because we have not found any evidence or theoretical basis
for thinking that it affects saving then people would have said
that he was living in a world where people did not respond to
economic incentives and were not providing a sound basis for policy.
Q84 Mr Fallon: I would like to ask
about the Long-term public finance report, it is Box 4.2.
Turner costs its package at £7.6 billion and indexing the
Guarantee Credit is another £6.4. The Government says, "As
the Pensions Commission has stated, `against this level the cost
of the package is £14 billion' in 2020 expressed in real
terms." If that is right, what was the row about between
the Chancellor and the Turner Commission just before publication?
Is this what the row was about, the assumption that the Guarantee
Credit would be indexed in that way? It is page 39 of the Long-term
public finance report.
Mr Chote: The debate about what
you assume for earnings or price indexing was one part of it.
The other part of the debate was whether you assume the savings
that arise from the rise in the state pension age for women have
in effect already been spent or whether, as Turner in one of his
projections was implying, if you look at the pensions spending
in isolation then there is a saving there and that if you start
to be more generous during that period you are absorbing that.
The Treasury has argued, I think probably with some justice, that
that would be a reasonable line of argument to take if the decision
on the women's state pension age were part of his package, but
in fact it has already been out there. It has not actually been
spent and he has not clearly said where you would spend it, but
it is clearly already on the books. In some sense I think there
is a bit of justice on the Treasury's side there in saying that
it is somewhat unfair to include that saving. On the other hand,
the DWP's numbers have been suggesting that they look at earnings
indexation over the longer term and that seems to be a reasonable
thing. If you do not earnings index the pension credit then you
do get a situation where the possible state support just becomes
less and less generous relative to the standard of living of people.
Is that a plausible baseline for an assumption?
Q85 Mr Fallon: I want to be clear
whether or not Box 4.2 resolves the row so that there is no further
factual dispute about the costs of Turner. Are we clear now about
the actual costs or is the Treasury?
Mr Chote: I have not gone through
this box in detail so I would not want to make judgments on that.
Chairman: Could you let us know by this
Q86 Mr Ruffley: He is not kidding
either, he means it!
Mr Chote: The clarifying note
that Turner produced after the row was running for a while certainly
made the situation somewhat clearer on this point about whether
you are assuming that he can count the savings on the women's
state pension age as being part of his package and then the issue
about whether you are assuming the earnings. It seems to me that
there is more justice on the Treasury side in one of those and
there is more justice on the Turner side on the other.
Q87 Mr Love: In his statement the
Chancellor said that he wanted to increase the number of homes
built in the UK from an average of 150,000 at the present time
up to 190,000, which he claimed was the rate of new household
formation, yet Kate Barker in her report recommended that there
needed to be 70,000 to 120,000 new homes built if we were to keep
the rate of long-term house price inflation down to a reasonable
level. I think it was 1.8% she was suggesting. On this basis,
is the Government doing enough to make homes more affordable for
Mr Weale: I think very much not.
I think the Government is terribly confused about whether rising
land prices are a good thing or not. They talk in the Pre-Budget
Report about how household wealth has risen very sharply since
1997 because of rising land prices, but fundamentally it is an
increasing burden on the future. I must say, I think what is needed
is a very substantial willingness to make extra land available
for housing. I think the focus on real estate investment trusts
is to some extent missing the point. That is allowing more money
to go into buying the land and not making more land available,
but we have to have more land available in order to avoid the
sort of increase in the price that we have seen in the past and
I do not think the Government is doing enough about that.
Q88 Mr Love: Let me take you on to
that because they are carrying out a consultation on the introduction
of a planning gain supplement. Will that do anything to increase
the supply of land for new homes?
Mr Weale: I do not think it will.
I have forgotten what it was called last time we had it in the
Mr Whiting: It was the development
Mr Weale: It is something that
has been tried before. It seems a good idea in principle because
if people make gains because of changes in planning rules why
should they not be taxed and I agree with that and why should
they not be taxed more than the normal capital gains tax process
would deliver. Perhaps it is a bit less clear why that should
be the case. I do not think the tax on its own is going to do
Mr Whiting: There is obviously
a very careful balance needed here. Again you can sympathise with
the idea of taking a greater proportion for the state for the
general local good of what is a potentially substantial uplift
in value but, of course, that has already been taxed and if you
do try and tax it too much then it is one of those classics where
the goose may stop laying the golden egg, which is exactly what
happened with the development land tax. The development land tax
became too complex, it tried to take too much and it choked development.
There is a very careful balance to be had here.
Professor Talbot: One crucial
difference, as I understand it, between the development land tax
and the new proposals is where the money goes. The new proposals
are that money will be retained by local authorities and that
changes the incentive structure for local authorities to free
up more land for planning purposes. If that worked then obviously
it would potentially create more land for housing development.
Mr Whiting: I agree with that.
I think that is potentially a very important feature because it
does focus it on local benefits rather than the money disappearing
into a central pot.
Q89 Mr Love: There has been a chequered
history in this area and the developers have held back in the
past at the very time when you are trying to bring land forward.
Mr Whiting: Yes indeed, although,
to be fair, the development land tax at one stage was looking
at an 80% rate of tax. There is no way that the planning gain
supplement is looking at that. One approaches it with an understanding
of the aim, welcoming the local nature, but let us be cautious
and let us see if we can get there and if there is a sensible
way forward then okay. But is it really just a question of looking
at the planning process and encouraging developers to enter into
negotiations over what should be contributed? Perhaps that could
be a better route. Let us go into it with an open mind.
Mr Weale: If you think you need
a tax that has to accrue to the local authority to encourage them
to change the way they handle their planning rules then it seems
to me that there is something very badly wrong with the planning
process. They should not need a bribe to do something that makes
Q90 Mr Love: I think there are further
recommendations coming forward on planning changes. Kate Barker
suggests that we should be very cautious in this area and that
the percentage of tax would be relatively low, but in her analysis
she also suggested that the cost of the planning gain supplement
would be passed back to the landowner if for no other reason than
because of the constraint of second-hand house prices. Do you
agree with that?
Mr Weale: Yes. What it means is
that the initial landowner will get a lower price for the land
than she/he would without the tax and seen in those terms that
has many of the characteristics of an ideal tax. When you start
to think about the mechanics of it, maybe then there are people
who will not bother to foster development, then you start to see
disadvantages. It will impinge on the tax owner. It will not impinge
on the house buyer.
Q91 Mr Mudie: This is included in
the Pre-Budget Report under the title "Meeting the productivity
challenge". I am just puzzled as to why this is in that part
of the Budget. In the same Budget, when you look at page 5, where
they list the items under this heading, there is nothing about
education. There is something about skills, but skills challenges
are often a matter of picking up the lack of achievement in ordinary
education. Is this a proper place for it or is this just an indication
that we are not properly focused on meeting the productivity challenge?
Why is housing seen as a central part of meeting the productivity
challenge instead of improving education?
Mr Chote: Presumably because a
more efficiently functioning housing market would help labour
mobility and that is going to help in the end. As you say, some
of the classifications of things and what the measures come under
cause you to raise your eyebrows a little. I was particularly
entertained by the freezing of the increases in fuel duty coming
under protecting the environment!
Angela Eagle: Perhaps if you included
the installation and the support for that there might be some
equilibrium about the environment.
Chairman: In terms of the productivity
aspect, I heard the Chancellor saying that houses were to be built
in areas near businesses or where businesses want them. I think
that was the link with productivity.
Q92 Susan Kramer: If you are going
to get more land out of the planning, would you be more in favour
of the equivalent of site value rating; in other words, taxing
empty, undeveloped land rather than taxing at point of development?
It seems to be the obvious alternative.
Professor Talbot: The answer to
your question is I do not know. It seems to me that Martin was
absolutely right to say that this is a policy issue which is about
land. One of the things I find extraordinary about this is that
we consider the land issues in two completely different policy
silos, one about agriculture and one about housing and actually
those things need to be taken together. If we are going to look
at a long-term reduction in subsidy to agriculture then we ought
to be looking at how that land can be released for other things,
one of which would be housing.
Q93 Susan Kramer: The Operating and
Financial Review, to what extent was that going to be a useful
tool in helping shareholders better understand their investments
and become more engaged? What was your opinion of it?
Mr Whiting: I think in general
we saw the Operating and Financial Review as a good way forward.
It promoted more openness, there were more general statements
about what was going on and we supported it. It seemed to be a
way forward in terms of just generally encouraging more openness
and more transparency. I am not an expert in it because I am just
a tax man
Q94 Chairman: Is this you trying
to get the sympathy vote?
Mr Whiting: We promote more openness
in the reporting process including over taxes, so to us it seemed
a sensible way forward.
Q95 Susan Kramer: Just from looking
at your clients, basically corporations are prepared to roll this
Mr Whiting: It was in the planning.
There has been a good deal of work into it because obviously a
lot of our clients are large PLCs which have to factor it into
their planning and preparation. Most of them have put a good deal
of effort into gearing up, some have already started to publish
OFRs along the lines which are required because, after all, this
was an industry-initiative from the accounting bodies, a lot were
part way, at least, down the track.
Q96 Susan Kramer: Much benefit from
Mr Whiting: I do not immediately
see it. I think one could think of other things that people would
rather see scrapped.
Q97 Chairman: You would not bring
it under the red tape issue, maybe just a knee-jerk reaction for
the Chancellor before his annual meeting?
Mr Whiting: I could not comment
on that. It is a mixed bit of red tape cutting.
Q98 Lorely Burt: I would like to
return to the pensions issue but perhaps from the other end of
the spectrum. Looking at the pensions tax simplification and SIPPS,
we did hope that if residential property was going to be taken
out of the SIPPS, with the exception of this Real Estate Investment
Trust idea, that it would have been done a lot sooner, quite honestly.
Mr Whiting: Yes.
Q99 Lorely Burt: I am interested
to know what you think. First of all, do you think the Chancellor
was right to take residential property out, and why do you think
it took so long?
Mr Whiting: It is one of those
things where it is a difficult balance, of course, and in some
ways there is a deal of disappointment because the whole aim of
the pensions reform is simplification, deregulation, et cetera.
One recognises that particularly with a certain amount of media
and other pressures that have been around, people might be pushed
into unfortunate investment selection and, therefore, maybe it
is right to constrain the investment. I have to say I hoped one
could get to that by good advice, guidelines and publicity rather
than regulation. Obviously one worries that the regulations to
be imposed will be a little too extreme, extreme in the sense
of too complex. The net result of saying if you want residential
property in your SIPP you can go into it via a REITthat
fine Yorkshire investment vehicleis not perhaps such a
bad thing. You do at least have the option to go there, I doubt
whether anybody seriously wanted to put their fine wines or classic
cars in there, and other things which are prevented. I think the
disappointing feature, as you alluded to, is that it has taken
a long while to get there which suggests a bit of havering and
worrying about do we go down there. Undoubtedly given where we
are now or where we are going to be, it would have been far better
had that been laid down at the start.